India’s Public Stockholding: “Much more than a welfare program”

India’s National Food Security Act (NFSA) seemed to be an effective way to get a basic food ration to the majority of Indians who struggle to feed their families, at least in the state of Madhya Pradesh. There, Dr. Manohar Agnani, State Commissioner for Food and Civil Supplies, was expanding the reach and scope of the program while wringing fraud and inefficiencies from the system. But what about the payment of subsidized prices to farmers to acquire that food, the part of the NFSA that had run afoul of World Trade Organization (WTO) rules?

“The NFSA starts with farmers and procurement,” Agnani stressed to me. “It is much more than a welfare program.” He attributed their success in the state to “good supply chain management,” a phrase he seemed pleased to borrow from the private sector. This includes collection from farmers, local warehousing, and distribution to the network of ration shops.

“It’s very decentralized, with 3,000 collection centers in the state mostly managed by cooperative societies,” Agnani went on. “The government is buying about 40 percent of the state’s wheat, and even sending it to other states.”

But aren’t the larger farmers and the middlemen the ones who benefit from the minimum support price? I asked.

“We are buying from the smaller farmers,” Agnani said. He explained that in Madhya Pradesh farmers who are registered to sell to the Public Distribution System (PDS) cannot be large-scale farmers, traders, or from another state. Those rules are strictly enforced.

High support prices? Fake news

He said government support prices are not always higher than market prices, and they are never far above the market, in any case. He said that farmers sell to the government not only because the price is higher but because it is guaranteed. Better still, farmers are not locked in, so if prices are higher at harvest time, farmers can sell on the open market. And the government takes care of transportation, making it easier for farmers to cooperate in pooling their production.

One of the most important benefits of the program, Agnani concluded, was that it stabilized prices. With the government procuring 40 percent of the state’s wheat, the support price creates a price floor for the market where there was none before. Middlemen can’t pay low at harvest time, when the crop is plentiful, and they can’t sell high later when people are hungry. Such practices are commonplace in rural areas. Agnani seemed particularly proud of the role the NFSA plays in stopping exploitative traders from taking advantage of poor farmers.

Agnani attributed India’s relative price stability in rice and wheat, even in bad crop years such as this one, in part to government procurement. He contrasted the current market for lentils, which were seeing price increases that made this Indian staple more expensive than chicken. India imports 40 percent of its lentils and other pulses.

Agnani favored adding pulses to the PDS system, not only to add protein to diets but also to create a stable market and equalize subsidies for the different staple crops. One of the reasons lentil production is down is that guaranteed prices for wheat and rice make them a safer bet for farmers.

I told him that his list of benefits to farmers beyond the price sounded like a point-by-point response to what economists call market failures, cases in which markets fail to respond efficiently to supply and demand, prices fail to reflect costs, and market “imperfections” allow unscrupulous—or just intelligent—economic actors to take advantage of others.

Dr. Agnani smiled at my reference to market failures. “Yes,” he said confidently, “we are eliminating the information asymmetries.” Nobel Prize-winning economist Joseph Stiglitz couldn’t have said it better. With the NFSA, Agnani went on, the government was making rural markets work, not distorting them, and government involvement was less a market distortion than it was a market correction.

Back to the WTO

Biraj Patnaik of India’s Right to Food Movement had been in Bali and Nairobi explaining to anyone who would listen that the NFSA deserved to be exempted from the WTO’s arcane rules. India had been accused of distorting trade by exporting from its food reserve when stocks accumulate. By all accounts, they sell on local markets, which may well affect export prices. But they are not dumping surplus grains on international markets.

In any case, India’s actual subsidies—the portion of the support price above market prices—is far lower than the WTO alleges. As Biraj patiently explained, India’s 13,600-rupee/ton support price for paddy rice that year was about 100 rupees higher than market prices. That’s a 100-rupee/ton subsidy, which does not even approach India’s WTO limits. The only reason it seemed like a large subsidy was that WTO rules compare the support price not to current market prices but to the old reference price, from 30 years earlier, of 2,280 rupees/ton. Why the big difference? Inflation, of course, and any decent economist would tell the WTO to index its reference prices for inflation so such misleading calculations could be avoided.

That WTO accounting trick makes India’s 100-rupee rice subsidy look like one that is at least ten times higher. It would put India above its agreed subsidy limits.

In 2017, agricultural prices are once again low, and there is evidence the U.S. is again exporting its own subsidized crops at dumping-level prices. Programs such as India’s become more important than ever, as they allow governments to protect some of the most vulnerable farmers from dumping. Those food reserves can cushion price spikes in the event of drought or market fluctuations.

India’s food security and stockholding program uses precisely the same policies that the U.S. used in its early farm policy coming out of the Great Depression. Exactly the same: price supports, food reserves, administered markets, subsidies. The U.S. government used them because they work. India and other countries should be allowed to use them, too. Because they work.